The outlook for Asian equities

Martin Currie’s Asian equity investment specialist Andrew Graham outlines the major investment themes in Asia over the coming year.

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  1. Andrew Graham

What opportunities are on your radar?

We expect further development of the four powerful secular trends which are supporting Asian economic growth: consumption, trade, infrastructure and technology.

Consumption

Rising wealth is fuelling consumer spending, thanks to high employment levels and wage growth.

The middle class (the largest market for consumer goods and services) is expanding rapidly and it’s estimated that approaching 90% of the next billion people entering the middle class globally will live in Asia. (Source: Statista)

Trade

Trade, meanwhile, is an increasingly important driver. Asia is now its own largest trading partner and the region is seeing the benefits of proximity, high economic growth, a broadening of manufacturing bases and lower trade barriers.

Infrastructure

This boom in trade, alongside population growth and urbanisation is creating an ever-larger need for infrastructure in the region. The degree of urbanisation in Asia today is less than 50%, compared with nearly 75% in Europe and 82% in Northern America. (Source: Statista, Population Reference Bureau).

Technology

Finally, Asia is already home to several world-class technology companies at the forefront of innovation, from consumer electronics and semiconductors to social media and e-commerce. These businesses are continuing to invest significantly in research & development.

In particular, rising labour costs and raw materials prices are prompting many businesses to increase focus on how they use technology to offset input costs.

We expect this to continue in 2019. Whether this is companies that can provide competitive solutions to these challenges, or those that can adopt solutions better than their peers, it is an area we are always keen to watch carefully.

As an example, companies are using technology to meet cost headwinds by reconfiguring production lines, adding more automation and using developments in material science to make components stronger and lighter at the same time.

Managing the risks

It’s fair to say that the main factors affecting equity market sentiment (liquidity, earnings momentum, bond yields and oil prices) are less supportive than they were 18 months ago.

Depending on which of the major central banks you are looking at, quantitative easing (QE) is either being reversed, tapered or stalled; estimates revisions have rolled over; while Brent crude has been significantly higher than its 2017 average for most of 2018.

US dollar

The strength of the US dollar has been a much talked about risk for the region’s equities.

Historically, there is a strong inverse relationship between the US dollar and Asian markets.

In 2017, the weaker US dollar coincided with large flows into emerging market equities, this growth in flows has slowed significantly since the dollar recovered from the end of April.

Trade wars

Likewise, the issue of a US/China trade war has also dominated headlines.

Trade tensions do represent a challenge to the established global economic order and there are some longer-term implications for global growth, but they are not our greatest concern.

Liquidity

Our focus though is more on liquidity and how the unwinding of QE plays out in asset markets and leveraged investment strategies.

However, there are still some clear positives for investors in Asia. Valuations are now back to slightly below 10-year averages, (a result of the MSCI AC Asia ex Japan falling significantly since its peak in January 2018).

Attractive valuations

And, despite stronger prospects for the region’s economic growth, the Asian market is trading at a 25% discount to global equities. (Source: Martin Currie and MSCI, based on LTM p/e ratios as at 28 November 2018).

What’s the market missing?

From our perspective, it feels like the long-term implications of the Greater Bay Area (GBA) development plan have escaped a lot of people’s attention.

This initiative, launched in 2017, aims to unlock the combined potential of Hong Kong, Macau, Shenzhen and the surrounding nine cities in the Pearl River Delta area of Guangdong province.

Despite only comprising around 5% of China’s 1.4 billion population, the area contributes around 12% of GDP.

Attracting quality companies

The GBA has already attracted world-class technology companies: Shenzhen is the headquarters of media and internet giant Tencent - while China’s top three smartphone manufacturers are also based within the zone.

We believe there is the scope for the area to become a Chinese equivalent to the San Francisco Bay area in the US, with industries focused on financial services, cloud computing and artificial intelligence already basing their operations in the GBA.

Vast opportunity

The investment opportunities from this will be vast. We should see increased demand for business travel and accommodation, as well as infrastructure growth to improve connectivity between the main cities in the GBA.

In addition, there will need to be links from those cities to the rest of China, as well as all the other service structures required for the influx of people and capital.

The parallels being drawn with the San Francisco Bay area demonstrate what an exciting opportunity there is in the development plan - for stockpickers this should be a rich seam of opportunities.

Andrew Graham is Manager of Martin Currie Asia Unconstrained Trust.

Important Information

Past performance is not a guide to future returns.

This information is issued and approved by Martin Currie Investment Management Limited. It does not constitute investment advice or represent an inducement to invest.

The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.

The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.

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